Posts Tagged ‘Australia’

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When surveys start concluding that certain vital sectors of the UK economy are enjoying the best growth rate since 2006, you know you need to start taking things more seriously. Until recently the UK recovery looked – how can one put it? – well, it looked quite nice. Surveys and hard data pointed to growth; they suggested that the UK was comfortably clear of recession territory, but there was always that reminder that the recovery was really quite lacklustre compared to what it was like before 2008. But then yesterday and this morning it changed. Not one, but two surveys have seen the light of day in the last 24 hours, which suggest that certain vital sectors are now seeing their best performance since 2006.

Just to remind you, the UK economy may not be in recession, but it is still in a downturn. GDP is still in excess of 3 per cent below the 2008 peak, and that is a record. Data goes back to the early years of the 20th Century and in that time no downturn has lasted as long. In fact so severe is the downturn that some are going further and calling it an economic depression. It is a funny sort of depression though. It is undeniably the case that unemployment is too high, but then neither is it at the kind of level that one would normally associate with economic depression. What is different this time around is that while employment has been higher than one might expect given what is happening in GDP, average wage increases have been lower. It is now more than three years since average wage increases were higher than inflation.

The latest data says the UK economy expanded by 0.5 per cent in Q2, compared to 0.3 per cent in Q1. So that’s an improvement, but the fact is that 0.5 per cent growth is not that good. At this stage in the economic cycle, with the economic output so far behind potential, the economy should be booming. Hold that thought. Four surveys have seen the light of day since last Thursday, and between them they suggest that the UK economy is finally growing the way it should be – it may even be close to booming.

First off, there was the latest Purchasing Managers’ Index produced by Markit/CIPS for manufacturing. The index rose to a 28 month high in July, with a score of 54.6 – with any score over 50 supposedly denoting growth. This was the best bit from the report: “New export business rose at the fastest pace for two years, reflecting increased sales to Australia, China, the euro area, Kenya, Mexico, the Middle East, Nigeria, Russia and the US.”

Second off, we got the latest Purchasing Managers’ Index, again from Markit/CIPS, this time for construction. The index pointed to the fastest rate of residential construction since June 2010 and the steepest improvement in new order levels since April 2012.

So far the story is okay. Surveys point to an economy improving, but at best they only suggest the performance is comparable to what we saw in 2011, maybe late 2010. But the UK economy was not in good shape back then, so big deal. The UK economy is not as terrible as was in 2012, but it is as bad as it was in 2011.

But then yesterday the story became altogether more promising. The latest Purchasing Managers’ Index for services rose to its highest level since 2006. In fact with the headline seasonally adjusted Business Activity Index standing at 60.2, it was the highest reading since December 2006.

But even that is not the best bit. July also saw the sharpest rise in backlogs of work since February 2000. Now when backlogs rise, you can normally expect output to rise in the following months to try to catch-up. In other words, if anything, the next few months should be even better. Collectively, the three PMIs point to quarter on quarter growth of 1.5 per cent. If that proves right, the UK will have enjoyed its fastest growth rate in 14 years.

Finally, this morning saw a survey from the British Retail Consortium indicating that retail sales rose by 3.9 per cent in July, which is the best year on year rise since 2006.

Okay, there are snags. For one thing much of the expansion appears to be fed by UK households saving less, and borrowing more. Not everyone welcomes this development. For another thing one-offs partly explained July’s retail growth: with the good weather and sporting success being cited for reason for higher sales.

But lurking in the data are signs of something that may be more permanent. The rather unfortunate timing of the economic depression in the UK’s largest export market – the Eurozone –has really not helped things. It is encouraging that there are signs that the UK is exporting more outside the euro area. So, let’s enjoy the moment.

Some are now patting themselves on the back. They say that the economic recovery proves they were right. Austerity works, QE works. But is that really right? Read the next piece for an answer.

Does the recovery prove that QE works?

© Investment & Business News 2013

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Among the more positive news coming out of the US of late, there was one piece of darkness. While US consumers grew more confident, more jobs were created, and house prices rose, the darkness drew all eyes. The darkness was otherwise known as Purchasing Managers’ Indices, or PMIs, with the PMI for US manufacturing in May pointing to contraction, for example. Things looked quite different today, and altogether lighter, however.

The latest PMI for US manufacturing, this time for June, stood at 50.9 from 49. Any score over 50 is meant to be consistent with growth, so that was a relief.

There was more good news. The sub-index tracking new orders rose to 51.9, and the new export orders index rose to 54.4 from 51 in May. So far so good. Alas the PMI for employment stood at 48.7 – suggesting job losses. So while the news was bright, some darkness remained.

In Europe, the news was brighter, but only in the sense that navy blue is brighter than black, except that is for Spain. For once the news on this country looked promising; a kind of dark grey.

The PMI for Spanish manufacturing rose to 50 in June, a new 26 month high. Okay, 50 suggests growth is flat, but flat is better than contracting, and that is approaching the best piece of economic news for a very long time for Spain.

The PMIs for French, Italian, and Greek manufacturing also saw big improvements – 16, 23 and 24 months highs respectively. But then in each case the index was below 50, so that was darkish news.

To the surprise of many, the PMI for Germany fell sharply – down to 48.6, which was a two month low, and at odds with other more encouraging data that has seen the light of day recently.

Looking further afield, in China the PMI was down, but given that a major credit crunch is underway in China, the fall was not as sharp as many had feared. PMIs were also either below 50 or very close to 50 in Brazil, India, Taiwan, South Korea and Vietnam.

Australia is more interesting. The manufacturing PMI has been below 50 since 2001, but in June it rose to its highest level since February 2011. Although at 49.6, it still points to contraction. In Australia talk of recession is beginning to dominate. New Prime Minister Kevin Rudd looks as if he is trying to present himself as the man to lead Australia through and out of recession. With household debt high, house prices apparently overvalued, and with the slowdown in China sure to hit Australian commodity exports, the economy appears to be at its most precarious balanced for some time.

© Investment & Business News 2013

If QE in the US is coming to an end, what does that mean for the rest of the world?

Two countres that may be vulnerbale are Canada and Australia.

There are certain parallels between the Australian and Canadian economy today and the US and UK in 2007/08.

Take household debt.

Or take house prices:

Both the Canadian and Australian economies may be large and independent enough to be relatively immune from the effect of changes in US monetary policy.

However, such large levels of household debt combined with historically high house prices, does appear to suggest vulnerability, and if interest rates were to rise globally, the two economies may be susceptible to a sharp slowdown, maybe something more serious.

© Investment & Business News 2013

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Just a hint, but good news may have been lurking in the latest report on UK manufacturing. More to the point, it was exports – the one area in which the UK really does need to see a better performance – that provided the promise. On the surface there was nothing out of the way in the latest Purchasing Managers’ Index – or PMI – for UK manufacturing.

The index rose from 48.6 in March to 49.8. Any score under 50 is mean to suggest contraction. So the index is still suggesting UK manufacturing is in recession.

Furthermore, much of the gain can be put down to clearing backlogs of work, caused partly by all that nasty weather we had in March hitting production. The good news, however, relates to the more forward looking indicators. The output balance jumped from 47.8 to 50.5. Again, a reading of 50.5 is no great shakes, but everything is relative – and relative to recent months that is a good showing.

The sub index measuring exports, however, rose above 50 for the first time in a year, and in fact hit its highest level since July 2011.

Apparently, the companies which were surveyed to form the index reported rises in sales to clients in North America, the Middle East, Latin America and Australia.

Just to reiterate, things are relative.

UK manufacturing is still barely expanding, and export growth is trivial. Some of the improvement may have been down to catching up with output lost during that cold March. Furthermore, last week the CBI industrial trend survey indicated a decrease in total new orders driven by a fall in domestic demand in the last quarter. It recorded the fastest pace of decline since January 2012.

On its own this report does not point to recovery, not even an export recovery, but if other surveys support these findings over the next few weeks, that may not be sufficiently good news to justify opening a bottle of Champagne, maybe not even good enough to open a bottle of Prosecco, but a very small glass of cheap fizz may be forgivable.

© Investment & Business News 2013